Friday, January 31, 2014

In the massive Christmas-season card-processing data breach at Target, the culprits used a service provider’s credentials to gain access to the retailer’s point-of-sale network, officials have said. We were not told whether the service provider in question was a bank, but an earlier statement from Target seems to imply that. It is also not known whether the password was guessed, stolen, or leaked, but regulators are asking banks and other businesses to check for similar vulnerabilities. If the loss of any one password can allow intruders access to unlimited transaction data, then a bank or a transaction processing system is not secure enough.

The most obvious difficulties in this connection would be server operations staff and business continuity providers. Both need broad access to the machines in a network — for server operations, you need access to all server file systems, and for business continuity, you need to be able to copy all data in near real time to a geographically distant location — but this still has to have limitations, especially considering that the people providing these services are rarely company employees. Based on the need-to-know rules of security, neither should have general access to unencrypted transaction data, yet my suspicion is that at many banks and retailers these workers and others have unlimited access to all data. The problem, of course, is that if these workers have so much access, then anyone who steals their credentials has the same access. That is something banks will need to fix immediately if they discover such a vulnerability on their networks, yet it is not the easiest thing to fix.

A related issue is access monitoring. If someone has broken into your system and is getting away with the store, this should be noticed relatively quickly, but how? Intrusions are easier to notice if accounts have limited patterns of access and someone is looking regularly at the patterns of exceptions. At many banks, most I hope, this kind of monitoring is all in a day’s work, but at some it is only an afterthought. The Target episode is a warning of the scale of damage that can be done when an intrusion goes undetected for more than a few business days.

Target customers are reminded not to rely on email messages that appear to come from Target, since customer email addresses were stolen along with other transaction information. Any such message should be verified on the Target web site.

The large number of compromised payment card accounts has banks especially skittish this month, and billions of dollars in legitimate online and in-store purchases have been blocked because of banks’ fraud concerns. Some consumers, I have heard, were able to make their purchases after a series of phone calls to the merchant and the bank, but others surely did not go to the trouble, and there must be some who reacted badly to the blocked transactions and stopped using their cards entirely. When you consider the number of cards affected by the three latest card transaction breaches — Target alone counted almost half of Americans as its customers — the scale of this month’s card clampdown is large enough to put a dent in the banking business as a whole, and possibly even in U.S. retail aggregates. Imagine the economic consequences one day when, under pressure from criminal groups, the card processing network shuts down entirely, even if just for a few days.

There were two high-level banking suicides in London early this week, both Americans, one working at JPMorgan Chase and the other recently employed at Deutsche Bank. Separately, it was revealed that the former CEO of the Co-Op Bank, which needed a hedge fund bailout last year, got his job because he scored especially well on a psychometric test. He then went on to use drugs and make a series of ill-advised decisions as bank CEO. More needs to be known about the role of drug use, job stress, and other psychological factors and how they affect the experience of banking and the way banks make decisions. It’s a subject that will be hard to find out about — the executives and senior managers who know the most have a powerful incentive not to tell what they know.

There was a bank failure in Idaho tonight. State regulators closed Syringa Bank, based in Boise, with 6 branches and $145 million in deposits. Sunwest Bank, a large regional bank, is purchasing the assets and paying a 0.75 percent premium for the assets. It is the fifth failed bank acquisition for Sunwest Bank.

Last week there were two actions on credit unions. Bagumbayan Credit Union of Chicago was liquidated. It had 44 members. Parsons Pittsburg Credit Union, in Kansas, was placed in conservatorship. It has around 1,500 members.

To find Bernanke not using the word “taper” makes perfect sense if you look at what the word means. In its specialized Wall Street usage of the last two years, “taper” means that the Fed will crash the securities markets by reducing its securities-purchasing program. This is a misleading construction, though, and not just in the false conclusion of crashing the markets. It is misleading because of the way it presents the verb “taper” as a distinct action, when in fact the Fed is continuing to provide crisis-mode support to the money supply by purchasing securities every month, but in a smaller quantity than last month.

In other words, although “taper” is presented on Wall Street as an action, it is really the opposite — a reduction of action. The very existence of the word “taper” embodies a false assumption, the assumption that Wall Street deserves to have the Fed buy billions of dollars of its securities every month. In reality, those sales are not Wall Street’s right or privilege, but merely the accidental result of the central bank’s management of the money supply. It is not Bernanke’s way to choose words to confuse people, so you would not expect to hear him talking “taper” very much.

We could play the same linguistic trick by inventing a word for all those people who aren’t eating so much beef since beef has become a luxury item. Maybe we could say the consumers who have reduced the scale and frequency of their beef consumption are being “disobeefient.” Having invented that term, we could go on to say that the decline in beef was being caused the consumer trend of “disobeefience.” In a certain linguistic sense, that would be true, but in reality, it would just be a trick of words to take attention away from the way high prices are driving consumers away from the product.

Likewise with “taper.” Nowhere in the Fed’s charter does it say that it has a duty to protect speculators who have driven the price of securities and related assets up to unsustainable levels. By using the word “taper” and focusing attention on the Fed, people on Wall Street are trying to protect those exact market speculators from scrutiny. If you look at where Wall Street’s money comes from, this ploy should perhaps not be a surprise.

Besides the problem of running out of money, Shell essentially admits it is not ready to operate in the Arctic Ocean. Instead of taking charge of its own planning, it had relied on a U.S. Department of the Interior review which it now concedes was incomplete, following a court ruling to that effect last week. It is too late now to create a credible plan for operations in 2014, with new CEO Ben van Beurden referring to “the lack of a clear path forward” as a reason not to risk further equipment damage and losses in a haphazard operation in the Arctic Ocean.

Even if there were no operational risks, the financial risks are enough to give pause, and this is what stock markets were focusing on in their reaction to the announcement this morning. So far Shell has spent $5 billion for a few weeks of Arctic exploration. It failed to discover any oil, but even stating it that way is misleading. With operational difficulties, it barely got started. Given current world oil prices, and already looking at a tab worth billions, it is surely too much money to put at risk for a share of what geologists are hoping is a modest extension of the oilfields found onshore in Alaska.

All these obstacles are temporary in nature. After allowing a few years for oil prices to rise and engineers to design new equipment, Shell will probably decide it is ready for Arctic offshore drilling. Even then it will be a calculated risk. Despite the costs, in the oil business there is never a guarantee of actually finding oil.

Wednesday, January 29, 2014

Two farmers were sentenced to five years of probation yesterday in a rare food contamination case. The farmers had used contaminated water in a scrubbing machine, a setup that introduced listeria bacteria to potentially their entire crop of cantaloupes. More than 30 people across the United States died in 2011 and 2012 as a result. Criminal prosecution is rare in food safety cases, and it is hard to imagine that this case would have been investigated without the large number of related illnesses and deaths.

It makes sense that food safety prosecutions are rare because inspections are far less expensive and more effective at preventing harm from food. There is not much deterrent effect in prosecutions for problems that are caused by lack of knowledge and, often, lack of attention. Unfortunately, we cannot expect an increase in food safety inspections. Federal budget cuts, especially last year, ensure that there will be fewer inspections and more contaminated food than before.

Tuesday, January 28, 2014

This morning we woke up to the sad news of the passing of Pete Seeger. Among his many other accomplishments, he must be remembered as a singer who celebrated the value of work, often with the song “If I Had a Hammer.” The video below shows a performance of this well-known song from the Farm Aid fundraiser last year.

Monday, January 27, 2014

January is the traditional time for a retail chain to announce store closings. With the Christmas shopping season over and next Christmas a long way away, it is harder to defend the lackluster record of a retail location in January than it is in November. This year, the list of store closings is especially short, and this year, it features department stores. JCPenney is perhaps shrinking the most, with 33 on a recently announced list of closings, but Sears is closing its flagship store in Chicago along with a few other Sears and KMart locations where leases expire, and Macy’s has a list of store closings. Loehmann’s is closing completely, with liquidation sales underway in all 39 of its stores. Target, though affected by a recent payment card scandal, is closing just 8 stores.

Grocery chain Albertson’s is closing 26 underperforming stores in the next four weeks, half of those in California. In the Chicago area, Dominick’s closed most of its stores at the end of December. I know of at least three other grocery chains with closings underway. All in all, though, the number of store closings is tiny when you consider the total number of stores in the country.

It has led some analysts to wonder how retailers are managing to keep so many stores open. Some are predicting a “tsunami” of store closings over the next five years. Retail stores could be selling 30 percent fewer items, they think, with online purchases, 3-D printing, and increasing durability of products eating away at sales in stores. If stores are selling 30 percent less, they may be reducing their floor space accordingly. It sounds like a plausible scenario, but U.S. retail has looked overbuilt at least since 1989, yet the predictions of a crash have not come true yet.

With so many department store closings, some malls are losing their last anchor stores, but I am not aware of any malls closing right now. One saving grace for malls is that so few new stores are being built. Retail construction is picking up, but is still only 1/7 of the pre-2008 pace.

Saturday, January 25, 2014

There is a lot of speculation today about the severance pay of a fired Yahoo executive. The payment is somewhere between $40 million and $80 million, depending on which assumptions you believe. This kind of money is worth a headline not just because it could be a new record for a corporate executive fired for poor performance, but also because the payment comes from an employer that is financially struggling and could shut down within a matter of a few years.

There is an obvious problem when severance terms are this generous — or indeed, whenever they exceed about $2 million. As a worker, if you know you will be paid a fortune if you are fired, it creates a powerful incentive to get fired. No matter how proud you are as a worker, there is an unavoidable subconscious impact of knowing that if you got fired, you would be set for life. And since incentive payments may not be payable in a case of misconduct, but are fully due if the cause is poor results or organization change, the large severance plan creates an unnatural and unavoidable incentive to perform poorly and to contribute to unproductive organizational change.

At Yahoo, poor performance was not the real cause of the firing, and the termination payments, though undeniably large, are not quite so large when you look at them in economic terms. The largest component of the severance pay is $20 million to replace the signing bonus that had not yet been paid to the executive, and the signing bonus in turn was meant to replace the retention bonuses he would have received had he stayed with his former employer. By all outward appearances, he did a good job at Yahoo, but it didn’t make much difference because of Yahoo’s weak business plan. When it became clear that the company had made a mistake in hiring him, he couldn’t resign, and not just because he liked his job and wanted to keep it as long as he could — if he had resigned, he would have forfeited at least $60 million in pay. That is enough of a disincentive to deter almost anyone from resigning, no matter how a job is going.

Of course, that is part of the intention of severance pay — that a worker will stay on as long as the employer needs him. It worked that way in this case. What is not so clear is whether either the worker or the employer benefited. Just the sheer magnitude of executive pay creates a bizarre web of incentives and disincentives that in the end, probably deter productive work just as much as they motivate it. Executives would be more directly motivated if they were not paid so much.

The tax code effectively subsidizes these oversized executive pay plans, and that is one avenue that could be explored for changing things. Currently, virtually all executive pay is a tax deduction for the employer, no matter how outlandish. I would suggest a cap on corporate tax deductions for salaries, perhaps somewhere around 1.5 million per year for any one employee, and a very strict cap on deductibility of compensation of any kind for any employee at the level I have suggested before, around $19 million. Congress could, in principle, enact this change with a two-page statute. Obviously a reform like this would never come to a vote in the current do-nothing House, but perhaps after this year’s elections this kind of reform could be considered.

Friday, January 24, 2014

A Vatican official already indicted for carrying €20 million in cash into Italy on a private plane now faces money-laundering charges. According to prosecutors, payments that were recorded as donations for a proposed hospice were secretly paid out again. Around 50 people across Italy, including government officials, are thought to have been involved in this and closely related schemes. The defendant claims he was only acting as accountant and courier, and says higher officials in the Roman Catholic Church directed the irregular money movements.

In China, a bank-run hedge fund is expected to default at the end of the month. Credit Equals Gold #1 Collective Trust looks on the surface like a Ponzi scheme with its promise of 10 percent annual returns, but on closer inspection it is actually just a high-risk investment fund backed by a government-owned bank. High-yield investments naturally carry a greater risk of failure, and a failed coal mining investment is being blamed for the fund’s insolvency. There has been some speculation of a government bailout, but that is probably impossible because of the budget impact and the precedent it would create. As financial analysts have been pointing out for a couple of years, China is not a large enough country to bail out its entire banking system, and most of the system is experiencing financial stress in one form or another in the aftermath of a series of official programs to pump up the economy.

Standard Chartered Bank is floating rumors of a takeover in what looks like an urgent attempt to find a buyer. When asked about it, though, the bank denies that it is having problems or is seeking to be bought out.

The pace of U.S. bank failures may have slowed, but it is not just the smallest banks that are failing. Oklahoma regulators tonight closed The Bank of Union, with branches in Oklahoma City and El Reno, Oklahoma. The bank had $329 million in deposits and a similar amount of assets. With loan losses, the bank had essentially run out of capital. Oklahoma City-based BancFirst is assuming the deposits and purchasing two thirds of the assets.

Wednesday, January 22, 2014

The unusually cold weather in North America this winter is now causing spot shortages of fuel for heating. Temperatures are again about 10°C below normal east of the Rockies, though above-normal temperatures in and west of the Rockies partly make up for it. People drive less when the weather closes roads, but this is a small effect compared to fuel for heating, so oil and gasoline prices will be higher for a few weeks. I have heard multiple stories of houses running out of heating oil as the unusual weather throws off providers’ estimates of how much oil people’s furnaces are burning. The oil truck shows up with a note of apology.

These are passing weather events, and they won’t have much lasting impact on world oil prices. The extra spending on heating will slow down all other areas of the U.S. economy, though, and that effect will probably be detectable when economic reports for the first quarter come out.

Tuesday, January 21, 2014

Cast iron cookware fell out of favor in the 1970s. Automatic dishwashers, relatively new at that time, were unkind to cast iron and did better with the new “nonstick” pots and pans. At the same time, there were concerns about the energy efficiency of cast iron, which had to heat up before you could start cooking, and the effects of all the oil you would use when frying on cast iron. Now cast iron seems to be making a comeback. Some vintage cast iron pieces especially from the 1880s and 1890s are going for around $100 online. Meanwhile, less expensive but perfectly serviceable new cast iron pots and pans can be found at outlets such as QVC and Target.

TV chefs and nutritionists seem to be at the center of the cast-iron comeback. Some TV chefs have called for heavier use of cooking oil, the way it was done half a century ago, and that makes cast iron cooking easier. The circular cast iron griddle in my kitchen bears the name of a popular TV chef.

Some nutritionists are recommending cast iron cooking for people who are deficient in iron. Iron deficiency, they say, is a growing trend among adult women, though it remains rare among men. Traces of cast iron make their way from the cookware to the food, enough to make a difference, but in amounts so tiny that they are easily absorved — in contrast with food supplements, where most of the iron in the tablet goes to waste.

Another part of cast iron’s appeal is its durability. The latest nonstick pans can be destroyed in seconds if misused, but cast iron is likely to last for centuries even if you don’t use it perfectly — though it helps if you don’t leave it soaking in the sink for a day at a time. In an era when many people don’t own anything that’s designed to last a lifetime, cast iron provides a connection to the ages. A local dealer in old housewares says that he saw old-style cast iron cookware become a Christmas gift item for the first time last Christmas, with his stock completely cleaned out by Christmas Eve.

The durability of cast iron ensures that it will never be a big item in the stores. Once you buy a cast iron skillet, you may never need to buy a second one. But those nonstick pans? Despite advances in materials, they will still wear out and need to be replaced in a decade or less. The short replacement cycle for nonstick coatings ensures that stores will always feature those items first.

There are four essential tips on cast iron cooking for those who have never seen it done. First and most important, you may need an oven mitt to protect your hand when you pick up the pan. A new pan has to be “seasoned” before use: apply heavy cooking oil, such as coconut oil, heat up the pan to a cooking temperature, cool it down, and wipe it off. Cast iron rusts, so don’t put the pan in water (or the dishwasher) to wash it. And finally, don’t forget, cast iron pans are heavier, so they take several minutes to heat up.

Monday, January 20, 2014

I’ve been living with an off-peak electricity plan for only a short time, but already I’ve discovered that it is well suited to a Chinese approach to cooking supper.

The new electricity pricing plan I am on encourages me to put off evening electric use until after 6 p.m. That’s when the price goes down. If I want to save money on supper I can start cooking at 6:01. But that doesn’t mean I can’t start cutting up the vegetables beforehand. As it happens, that fits with the origins of the most familiar forms of Chinese cooking. The original idea there was that you can have a fire going for only a short time, perhaps because the small pile of sticks would burn away in a few minutes, so you have to do as much preparation as possible before you start the fire. The idea of thorough preparation before the cooking starts also fits my desire to keep the stove off until 6, but without delaying the meal until too much later. The same preparation principal applies regardless of whether I am following a Chinese recipe. I can cook faster by cooking at a higher temperature, in the Chinese style. Things happen faster at a higher temperature, though, so I have to pay full attention to stirring and turning the food — I can’t at the same time be chopping up something to toss in. Since this approach fits Chinese recipes so well, I may want to properly learn some Chinese recipes. I have attempted many of them but never really took the time to do them in the traditional way.

This is just today’s example of how non-linear progress is. A futuristic innovation in energy pricing has me revisiting a culinary tradition that took its shape centuries ago during a shortage of firewood. In my case, though, I actually have no shortage of firewood. I realize another option I have is to remodel my kitchen to incorporate a Franklin stove for cooking supper using wood as fuel. If people were to start doing that, that could turn a century of American cooking progress on its head.

Sunday, January 19, 2014

One of the announced changes in the NSA mass surveillance program involves scaling back the Three-Hop Rule (for telephone surveillance) to two hops. This might seem like a significant change, but in practice, it won’t make a difference. As I wrote last month, two hops already covers practically everyone who matters: registered voters, banking customers, shoppers, Skype users, and so on. The Two-Hop Rule is better than the Three-Hop Rule, but it won’t do anything to restore privacy. Real reform is probably impossible as long as mass surveillance of all personal communications media remains the government’s objective.

Saturday, January 18, 2014

Shell’s costs in attempting to drill for oil in the Arctic Ocean were large enough to put a dent in its 2013 profits. The Guardian story has inside information and thoughtful speculation on Shell’s problems:

The costs of a trouble-prone drilling programme in Arctic waters off Alaska have contributed to Shell being forced to issue a shock profit warning . . .

Arctic observers regarded the Shell exploration as inept from the beginning (in 2012). When the initiative launched, Shell’s ships inexplicably arrived north of Alaska weeks late in an area that only offers a few weeks per year of safe operation. Then, the planning and equipment appeared not to have made concessions to the Arctic Ocean climate, which is hostile even in comparison to the North Sea and other more familiar cold-weather offshore drilling sites. Even getting in and out of the Arctic through the Bering Strait proved more difficult than anticipated. People knowledgeable about Arctic conditions are easily found, but Shell was somehow operating on limited or inaccurate information. Yet the poor planning and preparation do not explain the high costs Shell apparently incurred. According to the information coming out of Shell, Arctic operations are simply more expensive than the company had budgeted for. Shell still has not decided if it will return to the Arctic Ocean in 2014. It could easily decide to wait until global oil prices rise.

Friday, January 17, 2014

Pope Francis yesterday dismissed the board of directors of Vatican Bank. The church-owned bank has stubbornly resisted reforms despite a culture of corruption and ties to a series of money laundering and real estate scandals. One of the past directors had already been replaced last year, but with this new change, the bank can hang up its “under new management” sign.

A bankruptcy judge rejected Detroit’s plan to settle swaps with two banks. The swap debts were secured with the city’s future income, but as the judge noted, the intangible collateral is essentially meaningless. Now that the city has given up control of its finances in bankruptcy, it no longer has the authority to assign that future revenue to a creditor, even if a pre-bankruptcy contract requires it. The two banks are essentially unsecured creditors now, a ruling that surprised most observers, but is consistent with the basic tenets of bankruptcy law.

The first bank failure of the new year is DuPage National Bank, based in West Chicago, Illinois, with $60 million in deposits. Republic Bank of Chicago is taking over the deposits and purchasing the assets. It is paying a 1.2 percent premium for the deposits. The return of bids with premiums is a favorable sign for banks — it indicates the expectation of only a small number of bank failures, so that there are more bidders than banks that fail.

It was 11 months since the last Illinois bank failure — another measure of how much bank failures have slowed.

Thursday, January 16, 2014

Tesla Motors is quietly about halfway from being a boutique auto maker selling a few hundred cars to being a major player with a U.S. market share over 1 percent. That analysis might have seemed like a stretch before the company’s latest earnings report, but that report this week pointed to a pace of sales roughly equivalent to a 0.25 percent U.S. market share, a big jump from the previous quarter. Future events that are easy to predict can be expected to at least double the company’s appeal: an expanded recharging network, a redesign of the most popular model for which a price cut is promised, more sales and service locations, and two or three years out, a new model with a less compact design. Unexpected events on the horizon may be just as significant, such as a spike in gasoline prices or a technological advance that makes the car battery smaller or lighter. If there is a faster increase in demand for Tesla’s electric cars, the automaker is in a position to meet it. It is the owner of a large, mostly vacant factory that, combined with its robotics-driven approach, looks sufficient to take it, perhaps just as quietly, to a market share above 10 percent. That can happen, of course, only if events intervene to give electric cars some new advantage over gasoline-burning cars. But, given the recent history of troubles in Detroit and in the oilfields, along with the steady march of changes in electric technology, such a turn of events would not be too surprising.

Wednesday, January 15, 2014

Ever since people have been using acetaminophen as a pain reliever, the drug has come with the caution that using too much of it can damage the liver. In recent years more careful study has found that acetaminophen is more toxic and in lower doses than previously recognized. Acetaminophen is now recognized as the predominant cause of liver damage and liver failure. The FDA’s new guidance for prescription drugs recommends limiting the dosage to 325 milligrams per capsule:

FDA is recommending health care professionals discontinue prescribing and dispensing prescription combination drug products that contain more than 325 milligrams (mg) of acetaminophen per tablet, capsule, or other dosage unit. There are no available data to show that taking more than 325 mg of acetaminophen per dosage unit provides additional benefit that outweighs the added risks for liver injury. Further, limiting the amount of acetaminophen per dosage unit will reduce the risk of severe liver injury from inadvertent acetaminophen overdose, which can lead to liver failure, liver transplant, and death.

Most U.S. cases of liver failure are linked to accidental overdoses of acetaminophen, but even recommended doses of acetaminophen carry a slight risk of serious liver damage or liver failure. It is probably safest to assume that every dose of acetaminophen causes liver stress that could reduce liver function, increasing body toxicity and potentially contributing to a wide range of other illnesses. For such a common drug, this is a significant public health problem. The FDA says it plans to withdraw approval for prescription drugs that contain more than 325 mg of acetaminophen, and it will address over-the-counter drugs separately. It is the prescription drugs that pose the greatest danger of overdose, though: patients sent home in a post-surgical fog may not read the fine print on the prescription pain relievers they are taking. It may not occur to them that the drugs contain acetaminophen at all.

Sunday, January 12, 2014

This weekend there is a new reminder of how toxic coal can be. A coal-processing disaster has a quarter of West Virginia worried about the water supply, as the water is temporarily too toxic to touch. The chemical in question is used every day to produce what is euphemistically known as “clean coal.” As coal is cleaned, the chemicals and contaminants are simply left behind in the mountains, where it hoped they will stabilize before they do too much harm. That depends, of course, on containment, and in an industry that is no longer cost-competitive with solar for electric generation, the money for reliable containment just isn’t there. As the cost of solar declines, the financial pressure on coal increases, so that we can expect this kind of large-scale coal disaster to recur on a yearly basis, in spite of talk about the need to improve. As spills occur, most of the costs are borne by the public, and the costs may occasionally be partly remediated by government. It is a perverse and roundabout way of subsidizing coal-generated electricity.

Update, January 17: To underscore the marginal financial condition of the coal business, the coal-washing chemical factory at the center of the latest disaster filed for bankruptcy today, saying it is unable to pay its operating expenses. Freedom Industries filed for bankruptcy reorganization under Chapter 11, but it is hard to imagine how it can escape liquidation.

Friday, January 10, 2014

Janet Yellen is taking some pains to dispel the assumption that the Fed is a branch of Wall Street. After “Helicopter Ben,” it may take a couple of years before Wall Street accepts the sobering thought that the Fed will not come galloping to its rescue after its next misadventure.

New mortgage rules that go into effect today are meant to ban the most common forms of high-risk home mortgage loans. Bank underwriters are required to find that a borrower will have the earning ability to make all the payments required by a home mortgage. This includes any possible interest rate increases and balloon payments, details that were often overlooked when underwriting mortgage loans before 2008. Underwriters are now required to document an applicant’s earning ability and credit history. There are also rules about mortgage disclosures and marketing practices. Loan officers, for example, can no longer receive bonuses for steering borrowers toward high-risk loans. None of these new rules should have any obvious impact, as they are not so tight as mortgage underwriting has become since 2009. However, under the ability-to-pay rules, some real estate speculators might find financing harder to come by. The one new rule that might have an immediate impact is a limitation on closing costs and points which now cannot exceed 3 percent of the loan’s original principal. This limit will affect refinancing more than it affects home purchases. If upfront fees and costs for a $50,000 loan are limited to $1,500, that may make banks a little less eager to make those loans.

U.S. unemployment has been falling as more workers drop out of the job market, but unemployment has stayed near record highs in Europe, with new records for unemployment set in Greece and in the eurozone.

Banks will be filing new financial reports in the coming weeks to cover the fourth quarter of 2013, and we can watch for bank closings among those banks whose new balance sheets show a deterioration in asset quality and liquidity. However, with so much private capital flowing into banking, the pace of bank failures is likely to continue to decline.

What I find most interesting is that people have saving money on their minds, and that it is a broad trend:

The majority – 56% – said they were "going dry" to save money . . . 19% said it was because "no one else drank in January".

When the popular image of a product makes people think of saving their money, that can be an early sign of a long-term downward trend. Purchasing habits change over a period of time, but changes may be inevitable after product perceptions have changed.

Tuesday, January 7, 2014

It is one of the most basic ideas in economic theory: you are less likely to buy something if the price is higher. Obviously, we avoid buying expensive items because we want to save our money for other things. But there is more to it than that. We have all had the experience of avoiding something expensive even when someone else is paying. Minimizing costs is not just a matter of having more money in a personal sense, but also seems to be related to the idea of winning — the basic drive that leads you to perform well in a video game or another context where your results are being accurately measured. You will want to do things efficiently and produce good results even before you stop to ask who will be paying the price.

I remember noting this when I saw college professors going to some trouble to select less expensive textbooks, even though it would be the students, not the professors, who would be purchasing the books. The same effect works when doctors select medical tests for patients, according to a study. The study was published in November 2013, and I found the story in HCP Live:

Most of the time, U.S. doctors don’t know what the lab tests they order will cost. When computers running electronic health record (EHR) systems showed current indicative pricing for lab tests to doctors, most doctors ordered fewer and less expensive tests. The study looked at only 27 common laboratory tests out of the hundreds of routine medical tests. The cost savings were slight, about 11¢ per patient visit, but they would add up quickly if measured across the whole range of medical tests.

This kind of effect shows the advantages of better decisions when people know more about the costs of the resources they are using. Part of the challenge in improving the efficiency of work is having more and better information about costs readily available for people who will be making decisions that involve the use of specific resources.

Monday, January 6, 2014

A major winter storm disrupted the first two work days across large parts of North America. We might have been able to reboot the new year this morning, the first Monday morning of the 2014, basically pretending that last week didn’t count, but for another weather system bringing startlingly cold air to nearly all of the North American continent. This weather system is colder than the one we saw a month ago, and though it may linger for just a few days, it will be cold enough to do some damage in that short time. As one measure of how cold it is, all 49 of the U.S. states in North America are expected to record freezing temperatures tonight.

I write this as the cold weather has not yet reached where I am, and rain showers are melting the snow from the last storm. But it is barely sunrise, and the temperatures have already started to drop. Rain may give way to snow in about two more hours, and when the temperature falls below freezing, it is not expected to go back above freezing until Thursday or Friday. By the time the extreme cold air moves out, many of us will have lost the first week of the year. It is only a week, but looking at it a different way, it is 2 percent of the year. In macroeconomic terms, that is a big deficit to try to catch up from.

Those of us dealing with the weather when we had hoped to be working will have to do the best we can with it. Whatever we are able to accomplish in spite of this week’s weather will take some of the pressure off the weeks to come.

Saturday, January 4, 2014

Is 2014 the year of global political chaos? It could seem so if you look at events in Europe, Japan, China, southeast and southwest Asia, tropical Africa, the United States, and elsewhere. If there is a common principle underlying many of these political dramas, it may be that electronic communication has made the classic divide-and-conquer political strategy unreliable. It is harder to divide people if they can get together and compare notes on what you are doing. The plans of the NSA, the Syrian military, and the insurgents in Bangladesh, to cite just three examples, all depended on divide and conquer, and are faltering in spectacular fashion as they find they must take on the world all at once.

Thursday, January 2, 2014

More than a few things are changing at the start of 2014. Looking just at the United States:

A technical change in incandescent light bulbs will provide better lighting efficiency while increasing the price of the least expensive light bulbs.

The Fed has announced it is reducing the scale of its monthly bond-buying program by 12 percent this month.

There are a raft of tax changes, including the expiration of the sales tax deduction for federal income taxes, the expiration of deductions and tax credits for energy initiatives in many states, and sales tax on Amazon.com sales in many states. Many of the federal tax rules on health insurance are changing with the health care overhaul that goes into effect this year.

Wednesday, January 1, 2014

I heard from people who got their health insurance ID numbers by email yesterday and are making their premium payments today. Their health coverage starts today, as planned, if not quite as smoothly as planned. And this is just one of many new things that are launching today. When something new happens after a period of planning and preparation, the naysayers are left out in the cold. With respect to today’s expansion in health coverage, it was more than a few people who said this day would never come, who spent the last couple of years saying, “You people will never be able to see a doctor.” It was the consensus of the mainstream news reports. Right up until Christmas Eve, they really thought they could stop that train. But today, with the work completed, the naysayers are remembered not as critics, but as extra obstacles. They contributed nothing, did no work of their own, but made the work that had to be done harder than it had to be. It is always this way. New things come about and problems are solved in spite of skeptics and obstructionists. We say “Happy new year,” not “Happy nay year.”

Everyone sooner or later has something new to offer. Often you can avoid the extra distance, the detour around the obstructionists, just by not telling very much of what you are working on. On the other side of the exchange, when you see people trying something new, try to not muddle up their efforts too much by telling them the way things are and why nothing can change. It is the nature of change that those of us who are not directly involved in the work never quite see what is coming until it has already happened — and even then, sometimes it is difficult to grasp. New things happen no matter how skeptical we are. Happy new year!